S AND C CORPORATIONS. Jennifer M. Boll, Esq. Hodgson Russ LLP

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1 S AND C CORPORATIONS by Jennifer M. Boll, Esq. Hodgson Russ LLP 89

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9 BUSINESS ORGANIZATIONS: Tax and Legal Aspects Compared LLCs, S Corporations and C Corporations November 4, 2015 S AND C CORPORATIONS Presented by: Jennifer M. Boll, Esq. Hodgson Russ LLP 677 Broadway, Suite 301 Albany, New York Railroad Place, Suite 300 Saratoga Springs, New York (518) jboll@hodgsonruss.com 97

10 I. Corporate Organization A. Articles/Certificate of Incorporation II. Other Documents 1. Filing Requirement Must be filed with NY Dept. of State/Delaware Division of Corporations or other relevant state office of corporations 2. Limits on Name/Purpose a. New York certain words are not permitted or the use is restricted in the name of a corporation (NY BCL 301; see Appendix A for a list). b. New York certain corporate purposes, including promotion of education in any way, the establishment or maintenance of a hospital or facility providing health related services, and the establishment or operation of a substance abuse, substance dependence, alcohol abuse, alcoholism, chemical abuse or dependence program require the consent or approval of another state agency. A document indicating the consent or approval of the relevant state agency must be attached to the Certificate of Incorporation when the certificate is submitted to the Department of State for filing. Before issuing its consent or approval, the regulatory agency typically requires that specific purposes be stated in the Certificate of Incorporation. 3. Filing Fees a. New York fee for filing Certificate is $125 plus a tax on shares equal to $10 for up to 200 no par value shares or par value shares with value up to $20,000. If more shares issued, tax is equal to $.05 per share no par value or.05% of the par value of all of the shares being issued with par value. (NY Tax Law 180) b. Delaware fee for filing is $89 plus $9 per additional page. A Delaware registered agent is required. 1. Statement of Incorporator appoints initial Board of Directors 2. Bylaws defines standards of governance for the Corporation (See Appendix B) 3. Shareholder Agreement defines relationship among shareholders (See Appendix C)

11 III. Taxation A. C Corporations 1. Taxation governed by Subchapter C of Internal Revenue Code. 2. Corporation files income tax return (Form 1120) and pays taxes on its own taxable income. 3. Organization of a C corporation is typically tax-free pursuant to IRC 351: No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (80% or more of vote and # of shares) of the corporation. 4. Shareholders taxed only when and if receive dividends. See IRC 301(b) (tax treatment may be (i) taxable dividend, (ii) non-taxable return of capital, or (iii) gain, depending on the corporation s earnings and profits and the shareholder s basis in his or her shares). 5. Upon liquidation, corporate level tax on any appreciation of assets (even if distributed in kind to shareholders) and tax to shareholders on any gain relating to their shares (in general computed as difference between FMV of property/$ received from corporation and the adjusted basis of their shares of stock). See IRC 336(a) and 331. Example: C Company owns land with a FMV of $1000 and adjusted basis of $100 and has cash equal to $315. X owns all of the stock of C Co. X s shares have a basis of $300. Assume the individual rate on gains is 20% and corporate rate is 35%. If the land is distributed to C Co. in complete liquidation, in general, results are as follows: Rate Gain Tax C Co. Tax:.35 * ( ) $315 X Tax:.20 * ( ) $140 Total tax is $455 and X is left with land valued at $1000. Tax is due on a deemed sale of the land and on the deemed sale of the stock. 6. Employee-shareholders of C corporations may be afforded all tax-favored fringe benefits available to other employees (compare to S corporations, below)

12 B. S Corporations 1. Taxation governed by Subchapter S of the Internal Revenue Code. 2. Generally flow-through taxation so that items of income and expense are not taxed to corporation directly, but rather to the shareholders in proportion to their share ownership. 3. To qualify as an S corporation, must file Form 2553 on or before the 15 th day of the third month of the start of the tax year to be treated as an S corporation for the full tax year. If fail to do so, there may be C corporation taxation on earnings and appreciation and limits on passive investments. 4. Qualification Requirements (IRC 1361) a. No more than 100 shareholders (family members are counted as one shareholder) b. All shareholders must be individual US citizens or resident aliens, estates, Qualified Subchapter S Trusts or Electing Small Business Trusts. c. No more than one class of stock (differences in voting rights are permitted, but all rights to distributions, whether liquidating or operating, must be identical). Consider other arrangements in this regard as well. i. PLR found a second class of stock where under the certificate of incorporation some shareholders were to be paid dividends in additional shares of stock and other shareholders were to be paid dividends in cash. ii. PLR held that options issued without an exercise price create a second class of stock. iii. Treas Reg (l)(2)(iii) provides that a buy-sell agreement does not create a second class of stock unless: principal purpose of agreement is to circumvent the one class of stock requirement; and agreement establishes a purchase price that, at the time the agreement is entered into is significantly below or in excess of the FMV of the stock. d. Cannot be engaged in a non-qualifying business such as most types of banks, insurance companies, domestic international sales corporations ( DISCs ), plus a few others

13 5. Many fringe benefits for S corporation shareholders are not deductible for any 2% or more shareholders (including payment of medical insurance premiums) and such shareholders cannot participate in flexible spending plans or cafeteria plans. See IRC 1372(a). 6. An S corporation and C corporation are similar in the rules relating to compensation payments made to shareholder-employees. They are treated as wages to the employee and deductible to the corporation. Income passed through to S corporation shareholder is not self-employment income. See Rev. Rul If a shareholder receives corporate distributions in lieu of wages, the distributions may be recharacterized as wages (and subject to FICA and FUTA). See Rev. Ruling There have been similar holdings in many court cases where a shareholder is actively working in the business. See e.g. Spicer Accounting v. US, 918 F.2d 90 (9th Cir. 1990); Veterinary Surgical Consultants v. Commissioner, 117 TC 141 (2001). 7. Distributions to S corporation shareholders are not subject to tax to the extent of the shareholder s basis in his or her S corporation stock. Basis begins with the investment the shareholder makes in the corporation and is increased by, among other things, income items attributed to the shareholder and decreased by distributions and loss/expense items attributed to the shareholder. 8. Selection will be revoked if corporation fails to meet any one of the qualification requirements at any time. If terminated, an S election cannot be made again for five years. PLR considered whether a transfer to a prohibited owner terminated the S election. In that situation, the founding shareholders of an S corporation executed a shareholder agreement proving that no transfer of shares was permitted unless: (a) there was prior consent of the other shareholders, (b) proposed transferee become a party to the shareholder agreement, and (c) no transfers would be allowed if it would terminate Selection. A court found the purported transfer null and void. Accordingly, the IRS held that the S election did not terminate based on the purported transfer. 9. Liquidation of an S corporation is governed by the Subchapter C rules gain and loss are recognized on the corporate and shareholder level. See IRC 336(a) and

14 Word or Phrase Restricted or Prohibited academy Restricted BC LLC LP acceptance Restricted BC LLC LP America Espirito Sport Fraternite Restricted Entity Type(s) Affected BC LLC LP annuity Restricted BC LLC LP arboretum Restricted BC LLC LP EL assurance Restricted BC LLC LP Appendix A Required Consent (if applicable) Statute(s) (See code identification listing at bottom of chart) Education BCL 301(a)(11) L 404(w) LLCL 204(i) PL (a)(3)(A) Banking BCL 301(a)(5)(B) L 301(a)(5)(B) LLC 204(f) PL (3)(B) US Olympic Committee 36 U.S.C Insurance Department Board of Regents and Commissioner of Education Insurance Department BCL 301(a)(5)(B) L 301(a)(5)(B) LLCL 204(f) PL (3)(B) BCL 301(a)(11) L 404(w) LLCL 204(i) PL (a)(3)(A) EL 216 BCL 301(a)(5)(B) L 301(a)(5)(B) LLCL 204(f) PL (3)(B) attorney Prohibited LLC LLCL 204(f) Judiciary Law 485 bank Restricted BC LLC LP Banking Department BCL 301(a)(5)(B) L 301(a)(5)(B) LLCL 204(f) PL (3)(B) benefit Restricted BC LLC LP blind Restricted BC LLC LP board of trade Prohibited BC LLC LP bond Restricted BC LLC LP casualty Restricted BC Insurance Department Social Services Insurance Department Insurance Department BCL 301(a)(5)(B) L 301(a)(5)(B) LLCL 204(f) PL (3)(B) BCL 301(a)(7) LLCL 204(g) PL (3)(C) BCL 301(a)(5)(A) LLCL 204(e) PL (3)(A) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(B) L 301(a)(5)(B) A-1 102

15 Word or Phrase Restricted or Prohibited chamber of commerce Prohibited BC LLC LP Citius Altius Fortius Restricted BC college Restricted BC community renewal Prohibited BC LLC LP conservatory Restricted BL Entity Type(s) Affected Required Consent (if applicable) Statute(s) (See code identification listing at bottom of chart) BCL 301(a)(5)(A) LLCL 204(e) PL 121- US Olympic Committee 36 U.S.C See university for details Board of Regents and Commissioner of Education Education BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(5)(A) LLCL 204(e) PL 121- BCL 301(a)(11) L 404(w) LLCL 204(i) corporation Prohibited LLC LLCL 204(e) cooperative Prohibited BC cooperation Prohibited BC council Restricted BC doctor Restricted BC education Restricted BC elementary Restricted BC endowment Restricted BC exchange Restricted BC LLC LP fidelity Restricted BC finance Restricted BC guaranty Restricted BC Cooperative Corporations Law 3(j) Cooperative Corporations Law 3(j) See union for details. BCL 301(a)(6) L 404(j) Education Education Insurance Department Attorney General Insurance Department Banking Department Banking Department and Insurance Department A BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(10) LLCL 204(h) PL 121- BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(B) L 301(a)(5)(B)

16 Word or Phrase Restricted or Prohibited handicapped Restricted BC LLC LP historical Restricted BC historical society Restricted BC history Restricted BC Entity Type(s) Affected Required Consent (if applicable) Social Services Education Education Education incorporated Prohibited LLC LLCL 204(e) Statute(s) (See code identification listing at bottom of chart) BCL 301(a)(7) LLCL 204(g) PL (3)(C) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(11) L 404(w) LLCL 204(i) indemnity Restricted BC industrial organization Restricted BC institute Restricted BC insurance Restricted BC investment Restricted BC kindergarten Restricted BC labor Restricted BC lawyer Restricted BC library Restricted BC loan Restricted BC mortgage Restricted BC museum Restricted BC Insurance Department BCL 301(a)(5)(B) L 301(a)(5)(B) See union for details. BCL 301(a)(6) L 404(j) Education BCL 301(a)(11) L 404(w) LLCL 204(i) Insurance Department BCL 301(a)(5)(B) L 301(a)(5)(B) Banking BCL 301(a)(5)(B) L 301(a)(5)(B) Education BCL 301(a)(11) L 404(w) LLCL 204(i) See union for details. BCL 301(a)(6) L 404(j) Education Banking Department Banking Department Commissioner of Education A BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(11) L 404(w) LLCL 204(i)

17 Word or Phrase Olympiad or Olympic or Pan-American or Restricted or Prohibited Restricted Entity Type(s) Affected BC Required Consent (if applicable) US Olympic Committee partnership Prohibited LLC LLCL 204(e) Statute(s) (See code identification listing at bottom of chart) 36 U.S.C prekindergarten Restricted BC preschool Restricted BC redevelopment Prohibited BC savings Restricted BC school Restricted BC secondary Restricted BC state police or state trooper Prohibited BC LLC LP surety Restricted BC tenant relocation Prohibited BC LLC LP title Restricted BC trust Restricted BC underwriter Restricted BC union or council or industrial organization or United Nations Restricted BC university Restricted BC Education Education Prohibited for BC s and s, except for redevelopment companies under the PHFL. Banking Department Education Education Insurance Department Insurance Department Banking Department Insurance Department Restricted BC Approval of Industrial Board of Appeals may be required. Secretary General of the United Nations. Board of Regents and Commissioner of Education BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(11) L 404(w) LLCL 204(i) Private Housing Finance Law 205(3) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(11) L 404(w) LLCL 204(i) BCL 301(a)(5)(A) LLCL 204(e) PL 121- BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(A) LLCL 204(e) PL 121- BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(5)(B) L 301(a)(5)(B) BCL 301(a)(6) General Business Law 141 BCL 301(a) (11) L 404(w) LLCL 204(i) A-4 105

18 Word or Phrase Restricted or Prohibited urban development Prohibited BC LLC LP urban relocation Prohibited BC LLC LP BCL = Business Corporation Law Entity Type(s) Affected Required Consent (if applicable) Statute(s) (See code identification listing at bottom of chart) BCL 301(a)(5)(A) LLCL 204(e) PL 121- BCL 301(a)(5)(A) LLCL 204(e) PL 121- L = Not-for-Profit Corporation Law LLC = Limited Liability Company PL = Partnership EL =Education Law U.S.C. = United States Code A-5 106

19 APPENDIX B BY-LAWS OF [NAME OF ENTITY] 1. Meetings of Shareholders 1.1. Offices. The principal office of the corporation shall be as stated in the certificate of incorporation. The corporation may also have offices and places of business at such other places within and without the State of New York as the board of directors may from time to time determine Annual Meeting. The annual meeting of the shareholders of the corporation, for the election of directors and for the transaction of such other business as may be set forth in the notice of the meeting, shall be held each year at such time and such place within or without the State of New York as the board of directors shall determine and the notice of the meeting or a duly executed waiver of notice shall specify. Annual meetings of the shareholders are covered under Section 602 of the New York BCL. The by-laws can set out the date and place of the meeting or specify that it will be fixed by the board of directors. These provisions do not require advance notice for any shareholder proposals. Public corporations may wish to require advance notice for any shareholder proposals so that the board may prepare its response and communicate with the other shareholders if necessary before the annual meeting Special Meetings. Special meetings of the shareholders for any purpose or purposes may be called by the board of directors and shall be held on such B-1 107

20 date, at such time and place, either within or without the State of New York, as shall be determined by the board of directors and stated in the notice of the meeting. The only business which may be conducted at a special meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be the matter or matters described in the notice of such meeting. These by-laws only permit the board of directors to call a special meeting. Alternatively, the bylaws may also authorize other officers (for example, the chairman of the board) or other persons (including shareholders holding a specified percentage of the outstanding shares of stock) to call special meetings of the shareholders. (See New York BCL Section 602[c]) Notice of Meetings. Written notice of each meeting of the shareholders shall be given, personally or by mail, not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deposited in the United States mail, with first-class postage thereon prepaid, directed to the shareholder at his or her address as it appears on the record of shareholders, or, if a shareholder shall have filed with the Secretary of the corporation a written request that notices to such shareholder be mailed to some other address, then directed to such shareholder to such other address. If transmitted electronically, such notice shall be directed to the shareholder s electronic address supplied to the Secretary of the corporation or as otherwise directed pursuant to the shareholder s authorization or instructions. The notice shall state the place, date and hour of the meeting, the purpose or purposes for which the meeting is called and, unless it is the annual meeting, indicate that the notice is being issued by or at the direction of the person or persons calling the meeting. The notice need not refer to the approval of minutes or to other matters normally incident to the conduct of the meeting. Except for such matters, the business which may be transacted B-2 108

21 at the meeting shall be confined to business which is related to the purpose or purposes set forth in the notice. This provision follows the requirements of Section 605 of the New York BCL. It is drafted to permit electronic notice. The method for electronic notice (for example, an address or facsimile number) must be supplied by a shareholder to the secretary of the corporation. (See New York BCL Section 605[a]) Waiver of Notice. Notice of meeting need not be given to any shareholder who submits a waiver of notice. Waiver of notice may be written or electronic and may be submitted before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of such notice by him or her. This provision follows the requirements of Section 606 of the New York BCL. If written, the waiver must be executed by the shareholder or the shareholder s authorized officer, director, employee or agent by signing such waiver or causing his or her signature to be affixed to such waiver by any reasonable means, including, but not limited to, facsimile signature. If electronic, the transmission of the waiver must either set forth or be submitted with information from which it can reasonably be determined that the transmission was authorized by the shareholder Procedure. At each meeting of shareholders the order of business and all other matters of procedure shall be determined by the person presiding at the meeting. Section 602(d) of the New York BCL provides that the by-laws may designate reasonable procedures for shareholders meetings, including, among other things, who can call and conduct the meeting. The officers that serve as the chairman of the meeting and his or her alternates vary with each corporation. For example, the president or Chief Executive Officer may act as the chairman. B-3 109

22 1.7. List of Shareholders. A list of shareholders as of the record date, certified by the corporate officer responsible for its preparation or by a transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. This provision follows the requirements of Section 607 of the New York BCL Quorum. At each meeting of shareholders for the transaction of any business, a quorum must be present to organize such meeting. Except as otherwise provided by law, a quorum shall consist of the holders of a majority of the votes of shares of the corporation entitled to vote at such meeting, present either in person or by proxy. When a quorum is once present to organize a meeting of the shareholders, it is not broken by the subsequent withdrawal of any shareholders. These by-laws define a quorum as the holders of a majority of the outstanding shares entitled to vote. This is also the default quorum in New York, but a corporation may elect to set the quorum as low as one-third in its by-laws or certificate of incorporation. (See New York BCL Section 608[b]). If a corporation wishes to provide for a greater than majority requirement as to a shareholder quorum, it may only do so in its certificate of incorporation. (See New York BCL Section 616). B-4 110

23 1.9. Adjournments. The shareholders entitled to vote who are present in person or by proxy at any meeting of shareholders, whether or not a quorum shall be present at the meeting, shall have power by a majority vote to adjourn the meeting from time to time without notice other than announcement at the meeting of the time and place to which the meeting is adjourned. At any adjourned meeting at which a quorum is present any business may be transacted that might have been transacted on the original date of the meeting, and the shareholders entitled to vote at the meeting on the original date (whether or not they were present thereat), and no others, shall be entitled to vote at such adjourned meeting. However, if after the adjournment the board fixes a new record date for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to such notice. Section 605(b)of the New York BCL provides that notice of an adjourned meeting is not required unless otherwise required under the by-laws. However, if a new record date is fixed for the adjourned meeting, then notice to each shareholder of record (for the new record date) is required. A record date is the date on which a shareholder of a company must officially own stock in order to be entitled to take certain actions, such as vote at an annual meeting or receive a dividend Voting; Proxies. Each shareholder of record shall be entitled at every meeting of shareholders to one vote for each share having voting power standing in the shareholder s name on the record of shareholders of the corporation on the record date fixed pursuant to Section 3 of Article VI of these by-laws unless otherwise provided in the certificate of incorporation of the corporation. Each shareholder entitled to vote at a meeting of shareholders may vote in person, or may authorize another person or persons to act for the shareholder by proxy. Any proxy shall be signed by the shareholder or the shareholder s duly authorized agent or attorney-in-fact and shall be delivered to the secretary of the meeting. The signature of B-5 111

24 a shareholder on any proxy, including without limitation a telegram, cablegram, facsimile signature or other means of electronic transmission, may be printed, stamped or written, provided such signature is executed or adopted by the shareholder with intention to authenticate the proxy. No proxy shall be valid after the expiration of 11 months from the date of its execution unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided by law. Directors shall, except as otherwise provided by law or the certificate of incorporation, be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election. All other corporate action to be taken by vote of the shareholders shall, except as otherwise provided by law, the certificate of incorporation or these by-laws, be authorized by a majority of the votes cast in favor of such action at a meeting of the shareholders. The vote for directors, or upon any corporate action coming before a meeting of shareholders, shall not be by ballot unless the person presiding at such meeting shall so direct or any shareholder, present in person or by proxy and entitled to vote thereon, shall so demand. Except as otherwise provided in the certificate of incorporation, an abstention shall not constitute a vote cast. These by-laws provide that the board of directors is elected by a plurality. Section 614(a) of the New York BCL provides that plurality is the default rule for election of directors unless the bylaws or certificate of incorporation expressly state otherwise. To receive a plurality, a director (or slate of directors) needs to receive more votes than any opponent. Since it is easier to achieve a plurality than a majority, this standard may reduce the risk of a failed election. Many large companies have adopted majority voting for elections as a response to (or to prevent) shareholder proposals Actions other than the election of directors are authorized by a majority (unless supermajority provisions are adopted). Shareholders may authorize another person to act for them by proxy, but the proxy expires after 11 months unless otherwise stated in the proxy. (See New York BCL Section 609[b]). B-6 112

25 1.11. Appointment of Inspectors of Election. The board of directors may, in advance of any meeting of the shareholders, appoint one or more inspectors to act at the meeting or any adjournment thereof, and shall do so if the corporation has a class of voting shares that is listed on a national securities exchange or authorized for quotation on an interdealer quotation system of a registered national securities association. If inspectors are not so appointed in advance of the meeting, the person presiding at such meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any inspector appointed fails to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. No person who is a candidate for the office of director of the corporation shall act as an inspector at any meeting of the shareholders at which directors are elected. New York corporations with listed stock must have an inspector at all meetings of the shareholders. (See New York BCL Section 610) Duties of Inspectors of Election. Whenever one or more inspectors of election may be appointed as provided in these by-laws, he or she or they shall determine the number of shares outstanding and entitled to vote, the shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. B-7 113

26 This provision follows the requirements of Section 611 of the New York BCL Written Consent of Shareholders Without a Meeting. Whenever by law shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Every written consent shall bear the date of signature of each shareholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this Section 13, written consents signed by the requisite holders to take action are delivered to the Corporation. Written consent thus given by the holders of all such number of shares as is required under this Section 13 shall have the same effect as a valid vote of holders of such number of shares. Prompt notice of the taking of any corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who have not consented in writing. This provision is permissible under Section 615 of the New York BCL. In New York, shareholder action by written consent must be unanimous unless otherwise provided in the certificate of incorporation. 2. Directors 2.1. Number and Qualifications. The board of directors shall consist of one or more members. Subject to any provision as to the number of directors contained in the certificate of incorporation or these by-laws, the exact number of directors shall be fixed from time to time by action of the shareholders or by vote of a majority of the entire board of B-8 114

27 directors, provided that no decrease in the number of directors shall shorten the term of any incumbent director. If the number of directors be increased at any time, the vacancy or vacancies in the board arising from such increase shall be filled as provided in Section 6 of this Article II. If the number of directors is not otherwise fixed as provided above, it shall be one. Each of the directors shall be at least eighteen (18) years of age. A board of directors must be comprised of one or more natural persons of at least 18 years of age. Section 702 of the New York BCL provides that the number of directors may be fixed by the by-laws or by action of the board or the shareholders under the specific provision of a shareholder adopted by-law. If the board is authorized to change the number of directors, it must do so by a majority of the entire board. Section 703 of the New York BCL provides that each director holds office until the next annual meeting. This by-law does not contemplate a staggered board. If it did, the term of the directors would need to be altered to reflect the staggered board structure Powers. The business of the corporation shall be managed under the direction of the board of directors, which shall have and may exercise all of the powers of the corporation except such as are expressly conferred upon the shareholders by law, by the certificate of incorporation or by these by-laws. Section 701 of the New York BCL authorizes the board of directors to manage the corporation Election and Term of Office. Except as otherwise provided by law or these by-laws, each director of the corporation shall be elected at an annual meeting of shareholders or at any meeting of the shareholders held in lieu of such annual meeting, which meeting, for the purposes of these by-laws, shall be deemed the annual meeting, and shall hold office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. B-9 115

28 This provision follows the requirements of Section 703 of the New York BCL Resignation. Any director of the corporation may resign at any time by giving his or her resignation to the President or any Vice President or the Secretary. Such resignation shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective Removal of Directors. Any or all of the directors may be removed with or without for cause by vote of the shareholders. This provision follows the requirements of Section 706 of the New York BCL, which also provides that any director may be removed for cause, at any meeting of the directors, notice of which shall have referred to the proposed action, by vote of a majority of the entire board of directors if such provision is contained in the by-laws. Directors cannot be removed without cause by the directors Vacancies. Except as otherwise provided by law or these by-laws, newly created directorships resulting from an increase in the number of directors and vacancies occurring in the board of directors for any reason except the removal of directors without cause may be filled by vote of a majority of the directors then in office, although less than a quorum exists, or any such newly created directorships and vacancies occurring in the board of directors for any reason may be filled by vote of the shareholders at any meeting of shareholders notice of which shall have referred to the proposed election. If any such newly created directorships or vacancies occurring in the board of directors for any reason shall not be filled prior to the next annual meeting of shareholders, they shall be filled by vote of the shareholders at such annual meeting. A director elected to fill a vacancy, unless elected by the shareholders, shall hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until his or her successor has been elected and qualified. B

29 Unless otherwise provided in the certificate of incorporation or in a by-law adopted by the shareholders, vacancies created by the removal of a director without cause must be filled by a vote of the shareholders. (See New York BCL 705) Directors Fees. Directors may receive a fee for their services as directors and traveling and other out-of-pocket expenses incurred in attending any regular or special meeting of the board. The fee may be a fixed sum to be paid for attending each meeting of the board of directors or a fixed sum to be paid monthly, quarterly, or semi- annually, irrespective of the number of meetings attended or not attended. The amount of the fee, if any, and the basis on which it shall be paid shall be determined by the board of directors. Nothing herein contained shall preclude any director from serving the corporation in any other capacity and receiving compensation for such services First Meeting of Newly Elected Directors. The first meeting of the newly elected board of directors may be held immediately after the annual meeting of shareholders and at the same place as such annual meeting of shareholders, provided a quorum be present, and no notice of such meeting shall be necessary. In the event such first meeting of the newly elected board of directors is not held at said time and place, the same shall be held as provided in Section 9 of this Article II Meetings of Directors. Regular and special meetings of the board of directors may be held at such times and at such places, within or without the State of New York as the board of directors or the President, or, in the absence or disability of the President, any Vice President, may determine. This section provides that the board or the President or any Vice President can determine the time and place of its regular meeting. Alternatively, the time and place of regular meetings could be fixed by the by-laws. (See New York BCL Section 710). B

30 2.10. Notice of Meetings. Regular meetings of the board of directors may be held without notice if the times and places of such meetings are fixed by the board. Except as provided in the preceding sentence, notice of each regular or special meeting of the board of directors to be held in accordance with Section 9 of this Article II, stating the time and place thereof, shall be given by the President, the Secretary, any Assistant Secretary or any member of the board to each member of the board (a) not less than three days before the meeting by depositing the notice in the United States mail, with first-class postage thereon prepaid, directed to each member of the board at the address designated by him or her for such purpose (or, if none is designated, at his or her last known address), or (b) not less than 24 hours before the meeting by either (i) delivering the same to each member of the board personally, (ii) sending the same by telephone, telegraph, cable, electronic mail or other transmission method to the address or contact information designated by him or her for such purposes (or, if none is designated, to his or her last known address or other contact information) or (iii) delivering the notice to the address or other contact information designated by him or her for such purpose (or, if none is designated, to his or her last known address or contact information). Notice of a meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting. The notice of any meeting of the board of directors need not specify the purpose or purposes for which the meeting is called, except as provided in Section 5 of this Article II and as provided in Article IX of these by-laws. This provision follows the requirements of Section 711 of the New York BCL. B

31 2.11. Quorum and Action by the Board. At all meetings of the board of directors, except as otherwise provided by law, the certificate of incorporation or these by-laws, a quorum shall be required for the transaction of business and shall consist of not less than a majority of the entire board, and the vote of a majority of the directors present shall decide any question that may come before the meeting. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time or place without notice other than announcement at the meeting of the time and place to which the meeting is adjourned. This provision follows the requirements of Sections 707 and 708 of the New York BCL Procedure. The order of business and all other matters of procedure at every meeting of directors may be determined by the person presiding at the meeting Action Without a Meeting. Any action required or permitted to be taken by the board or any committee thereof may be taken without a meeting if all members of the board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the board or committee shall be filed with the minutes of the proceedings of the board or committee. Section 708 of the New York BCL authorizes action without a meeting unless otherwise restricted by the certificate of incorporation or by-laws Presence at Meeting by Telephone. Unless otherwise restricted by the certificate of incorporation of the corporation, members of the board of directors or any committee thereof may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment B

32 allowing all persons participating in the meeting to hear each other at the same time. Participation in a meeting by such means shall constitute presence in person at such meeting. 3. Committees of Directors 3.1. Designation of Committees. The board of directors, by resolution or resolutions adopted by a majority of the entire board, may designate from among its members an executive committee and other committees, each consisting of one or more directors, and may designate one or more directors as alternate members of any such committee, who may replace any absent or disqualified member or members at any meeting of such committee. In the interim between meetings of the board of directors, the executive committee, if and to the extent permitted in the resolution designating such committee, shall have all the authority of the board of directors except as otherwise provided by law and shall serve at the pleasure of the board of directors. Each other committee so designated shall have such name as may be provided from time to time in the resolution or resolutions, shall serve at the pleasure of the board of directors and shall have, to the extent provided in such resolution or resolutions, all the authority of the board of directors except as otherwise provided by law. Under Section 712 of the New York BCL, the board of directors may delegate any action to a committee except for the following: Submitting any action to the shareholders which requires shareholder approval. The filling of vacancies on the board of directors or any committee. The fixing of compensation of the directors for serving on the board or on any committee. The amendment, repeal or adoption of by-laws. The amendment or repeal of any board resolutions which provide that they cannot be amended or repealed by a committee. B

33 3.2. Acts and Proceedings. All acts done and power and authority conferred by the executive committee from time to time within the scope of its authority shall be, and may be deemed to be, and may be specified as being, the act and under the authority of the board of directors. The executive committee and each other committee shall keep regular minutes of its proceedings and report its actions to the board of directors when required Compensation. Members of the executive committee or of any other committee may receive such compensation for their services as the board of directors shall from time to time determine. 4. Officers 4.1. Officers. The board of directors may annually appoint or elect a President, one or more Vice Presidents, a Secretary, and a Treasurer. The board of directors may from time to time appoint or elect such additional officers as it may determine. Such additional officers shall have such titles and such authority and perform such duties as the board of directors may from time to time prescribe Term of Office. The President, each Vice President, the Secretary and the Treasurer shall, unless otherwise determined by the board of directors, hold office until the first meeting of the board following the next annual meeting of shareholders and until their successors have been appointed or elected and qualified. Each additional officer appointed or elected by the board of directors shall hold office for such term as shall be determined from time to time by the board of directors and until his or her successor has been appointed or elected and qualified. Any officer, however, may be removed or have his or her authority suspended by the board of directors at any time, with or without cause. If the office of any officer becomes vacant for any reason, the board of directors shall have the power to fill such vacancy. B

34 Section 715(b) of the New York BCL provides that the certificate of incorporation may provide that all officers, or certain officers, will be elected by the shareholders instead of the board. The descriptions below set forth the typical powers and duties of the individual officer positions. Section 715(g) of the New York BCL provides that the powers and duties of the officers may be provided in the by-laws, and to the extent they are not provided in the by-laws, by the board. Section 715(h) of the New York BCL requires that an officer perform such officer s duties in good faith and with that degree of care which an ordinary prudent person in a like position would use under similar circumstances The President. The President shall be the chief executive officer of the corporation. He or she shall preside at all meetings of the shareholders and of the board of directors. He or she shall have the general powers and duties of supervision and management of the corporation which usually pertain to his or her office, and shall perform all such other duties as are properly required of him or her by the board of directors The Vice Presidents. Each Vice President may be designated by such title as the board of directors may determine, and each such Vice President in such order of seniority as may be determined by the board, shall, in the absence or disability of the President, or at his or her request, perform the duties and exercise the powers of the President. Each Vice President also shall have such powers and perform such duties as usually pertain to his or her office or as are properly required of him or her by the board of directors The Secretary and Assistant Secretaries. The Secretary shall issue notices of all meetings of shareholders and directors where notices of such meetings are required by law or these by-laws. He or she shall attend all meetings of shareholders and of the board of directors and keep the minutes thereof. He or she shall affix the corporate seal to and sign such instruments as require the seal and his or her signature and B

35 shall perform such other duties as usually pertain to his or her office or as are properly required of him or her by the board of directors. Each Assistant Secretary may, in the absence or disability of the Secretary, or at his or her request or the request of the President, perform the duties and exercise the powers of the Secretary, and shall perform such other duties as the board of directors shall prescribe The Treasurer and Assistant Treasurers. The Treasurer shall have the care and custody of all the moneys and securities of the corporation. He or she shall cause to be entered in books of the corporation to be kept for that purpose full and accurate accounts of all moneys received by him or her and paid by him or her on account of the corporation. The Treasurer shall make and sign such reports, statements and instruments as may be required of him or her by the board of directors or by the laws of the United States or by any state, country or other jurisdiction in which the corporation transacts business, and shall perform such other duties as usually pertain to his or her office or as are properly required of him or her by the board of directors. Each Assistant Treasurer may, in the absence or disability of the Treasurer, or at his or her request or the request of the President, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the board of directors shall prescribe Officers Holding Two or More Offices. Any two or more offices may be held by the same person. When all the issued and outstanding shares of the corporation are held by one individual, such individual may hold all or any combination of offices. B

36 4.8. Duties of Officers May be Delegated. In case of the absence or disability of any officer of the corporation or in case of a vacancy in any office or for any other reason that the board of directors may deem sufficient, the board of directors, except as otherwise provided by law, may temporarily delegate the powers or duties of any officer to any other officer or to any director. This provision does not specify which officers have the authority to execute agreements on behalf of the corporation. The board of directors may designate such authority by resolution at a later date. Alternatively, the by-laws may specify which persons have execution authority. For example, consider inserting the following: All agreements of the corporation shall be executed on behalf of the corporation by (a) the President or any Vice-President, (b) such other officer or employee of the corporation authorized in writing by the President, with such limitations or restrictions on such authority as the President deems appropriate, or (c) such other person as may be authorized by the board of directors Compensation. The compensation of each officer shall be determined by the board of directors. The compensation of all other employees shall be fixed by the President or the President s designees within such limits as may be prescribed by the board of directors Security. The board of directors may require any officer, agent or employee of the corporation to give security for the faithful performance of his or her duties, in such amount as may be satisfactory to the board. Such security may be in the form of a fidelity bond obtained by the corporation at its expense. Section 715(f) of the New York BCL expressly authorizes the board of directors to require an officer to give security for the faithful performance of such officer s duties. B

37 5. Indemnification of Directors and Officers 5.1. Right of Indemnification. Each director or officer of the corporation, whether or not then in office, and any person whose testator or intestate was such a director or officer, shall be indemnified by the corporation for the defense of, or in connection with, any threatened, pending or completed actions or proceedings and appeals therein, whether civil, criminal, administrative or investigative, in accordance with and to the fullest extent permitted by the Business Corporation Law of the State of New York or other applicable law, as such law now exists or may hereafter be adopted or amended, against, without limitation, all judgments, fines, amounts paid in settlements, and all expenses, including attorneys and other experts fees, costs and disbursements, actually and reasonably incurred by such person as a result of such action or proceeding, or actually and reasonably incurred by such person (a) in making an application for payment of such expenses before any court or other governmental body, or (b) in otherwise seeking to enforce the provisions of this Section 1, or (c) in securing or enforcing such person s right under any policy or director or officer liability insurance provided by the corporation; provided, however, that the corporation shall provide indemnification in connection with an action or proceeding (or part thereof) initiated by such a director or officer only if such action or proceeding (or part thereof) was authorized by the board of directors. B